If you’ve kept an eye on the markets in the past year, you know that 2017 was a banner year for stocks. In fact, both the Dow Jones and the S&P 500 celebrated the launch of 2018 by reaching record highs (1) and until the beginning of February 2018, we were experiencing the second longest bull market since 1929.
But market fluctuations are a normal and expected part of the economic cycle. What goes up must come down. A recent 10% and 3.75% drop for the Dow Jones and S&P 500, respectively, is a testament to that fact that markets ebb and flow. (2) In the last couple of decades, there have been several significant downturns that set many people back in their retirement plans. In fact, there have been sixteen down-bear markets in the last ninety years. In light of the recent market loss, you may be wondering what steps you can take to prepare your retirement plan for a downturn. Here are some solid financial principles that will help you keep your money and your emotions in check when the market takes a turn for the worse.
Safeguard Your Investments
Market volatility can mean the difference between living comfortably in retirement or just scraping by. Facing a decline the early years of retirement can be disastrous. Based on historical data, there is more than a 50% chance that you could experience a bear market in the first five years of your retirement. The following strategies won’t eliminate loss entirely, but they may provide a buffer against the natural ebbs and flows of the market.
One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
It’s easy to get swept away emotionally when the market negatively wreaks havoc on your finances. But if you stay true to your investment strategy and avoid making decisions when emotions are running high, you won’t run the risk of losing even more. As long as you have created a disciplined financial plan and are rebalancing your portfolio regularly, you are doing your part to prepare. Your number one priority is to protect your principal, so don’t gamble with your investments when the market is struggling.
Maintain Proper Asset Allocation
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are investing in the right types of holdings. This is the time to reduce your risk and ensure that you have the right asset allocation. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Rebalancing is also a key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it still reflects your appropriate level of risk and that you haven’t become too reliant on any one asset category.
Create an Emergency Fund
This strategy is all about being conservative. While cash investments may not provide a lot of growth, having a cash contingency fund with at least one year’s worth of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to invest even more into cash or cash equivalents, such as short-term bonds, certificates of deposits, or Treasury bills.
Work With Your Advisor
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can keep your retirement plan on track and work toward your financial goals. Have questions or need help? Schedule a free 15-minute introductory phone callusing my online calendar to discuss the steps you can take with your current retirement plan to increase profits and protect against loss, even when the market experiences a downturn.
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1on1financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.